Breakdown of gas prices

What I hope to do in this video
is explore the relationship between oil and gas prices. And you do see that there
is a very strong correlation between how they trend. This right over
here is oil prices, quoted at a specific
point on the planet. It is dependent
on where you are. As you can see, this is
in US dollars per barrel. In early 2008 around $100 went
up to $140 then came back down. And then it's been
trending up ever since. Now it's about $100 per barrel. This is where we see the oil
prices are per barrel basis. And then related to that you
see the price of gasoline. And this is even more
geographically specific. Because not only do have
transportation costs, but you also have very
region-specific taxation for oil and
sometimes regulation. But taxation is
the big part of it. But you do see it trends
up when oil prices trend up and then it goes down. And this is on a
per gallon basis. And these are the prices
right over here in New York. But they don't move
completely lock step. If anything you see that the
oil price on a per barrel basis is much more volatile than the
gasoline price right over here. But there is the
same general trend. When the oil prices moves
up this tends to move up. But it's not always in
the same percentage. But there's definitely
a relationship. Now, before trying to figure
out when you pay, say, $4 at the pump how
much of that is oil, and how much is refining,
and how much is transportation let's at least kind of build
up to that to think about just how does the oil
even end up in your car. And then we can build up
that price of the oil, or the price of the
gasoline, I should say. So this right over here, you are
probably familiar with these. These are oil rigs, two
very different types. This is an offshore oil rig. This is a land based oil rig. But they're both doing the
same fundamental thing. They're drilling into
the ground until they get to a pocket of oil. And then they will
pump that oil out and try to transport it
to the market somehow, first going through a refinery. Offshore is really fascinating. It really is an engineering
marvel how they do it. It might be sitting
out here in the ocean. And it will literally go
to the bottom of the ocean, go to the sea floor,
and then drill from there to actually
get to the oil pockets. So it's really an
engineering marvel. And you have to be very careful. It can be very dangerous
working on an oil rig. And obviously, if there's
an accident on them it could be an
environmental nightmare, like what we saw what
the BP situation. But it is undoubtedly
an engineering marvel. Now once you have that oil you
need to get it to a refinery so that oil can be broken
up into it useful parts. And the way that is typically
transported to a refinery is some combination of a
pipeline or an oil tanker. This right over here is
actually the Alaskan pipeline. And it takes oil from the
very northern part of Alaska to the southern part. So that it can then be put on
oil tankers, which can then transported anywhere in
the world to refineries. It could go straight
to a tanker. Actually even some offshore
places you could use a tanker. Or sometimes even if
they're close enough to land they actually
might have a pipeline that will take it to land where
it can go to a refinery or go to an oil tanker so it
can be transported even farther. And then from there,
it gets to a refinery. And so we could start to think
about how the price of oil is built up before we even
think about what a refinery even does. So let's say that the
current price of oil-- and I kind of rigged the
numbers, not to be too punny-- to work
out fairly well. But let's say that the current
price of oil is $90 per barrel. So, and this is
just a units thing, a barrel is equal to 42 gallons. So if I say I have
a barrel of water I'm really saying that I
have 42 gallons of water. And now all 42
gallons of crude oil do not turn into 42
gallons of gasoline. Out of 42 gallons
of crude oil you can get about 19 or 20
gallons of gasoline. For the sake of to
make the numbers easy I'll just go with 20,
20 gallons of gasoline. And then the rest
will be other stuff. So 22 gallons of other stuff. It might not even be 22 gallons. In fact it won't be. Some of it is just waste. Some of it is byproduct. Some of this is actually used
to fuel the refining process. So let me not write that number. So the rest is other stuff. So this refinery is paying $90
per barrel when it gets it. So that incorporates what the
oil producers are getting. It also takes care of
the transportation costs to the refinery. And let's say just for
the sake of argument that the refinery
can sell-- let's say it's doesn't even take care
of the transportation network. Let's say there's people who
are willing to buy directly from the refinery
at the refinery. They're willing to buy
gasoline at $3.25 per gallon. So the gas at refinery
people are willing to spend, or the transporter is willing
to pay them, $3.25 per gallon. And so from this
barrel they're going to get 20 gallons of gasoline. They can sell that
at $3.25 per gallon. So you're going to have
20 times $3.25, which is let's see 20 times 3 is 60. And then 20 times $0.25 is $5. So they're going to get
$65 for the gasoline. And then let's just say
for the sake of argument they get $35 for
the other stuff. And some of this other
stuff is quite useful. It's stuff like motor oil. It could be jet fuel. It could be natural gas. And it could be obviously fuel
to actually fuel the refinery. And so let's actually
start building this up right over here. So one way to think about it--
so let me draw it this way. We're up to $3.25 per gallon,
is what the price is exiting the refinery, what the
refineries getting for it. So let me draw it down here. So let's say that this is $1. This is $2. And this is $3. And then they're getting
$3.25 would be like that. That is what the
refinery is getting. And one way to
think about it, it's not completely because
all of their profit isn't coming from the gasoline. But one way to think
about it is the refinery, after refining this
barrel of crude oil that they paid $90
for, they're going to get $65 for the gasoline. And then they're going to
get $35 for the other stuff. So they made a combination of,
what is it, they made $100. They're able to buy
this crude oil at $90, do what they had to do. And then they're able
to sell it for $100. So one way to think about
it is that, at least in this situation, 90% of
what they're getting for it was their cost. But it breaks down between the
other stuff in the gasoline. So it's not super
easy to break down. But you can say, in this
example, a good chunk of this was the cost of gasoline. And it obviously depends
how you account for it. But a good chunk of it,
not the cost of gasoline, a good chunk of it is
the cost the crude. And this right over
here, you could say is how much the
refinery actually makes. And the amount that
the refinery gets versus what it costs--
so the amount they get for all of the product they
produce versus the crude oil that they have to pay
for, this margin, this is often called
the crack spread. And just to understand
what a refinery is doing, it's breaking up that crude
oil into its various parts. And it's actually a
fairly simple-- well, I don't want to
say simple process. Obviously when you
look at a refinery it does not look
like a simple thing. But the idea for the process
is fairly straightforward. It takes the crude oil and it
heats it up through a boiler. So right over here the
crude is getting really hot. This is the boiler. And the boiler is fueled,
often fueled or usually fueled, by some of the
outputs of that oil. So this is fire,
just to symbolize that it's getting hot. And then it goes into
a distillation column. And the distillation column,
that's why you see all of these towers right over here
in an oil refinery. Those are the
distillation columns. And so in a distillation column
the different parts of the oil have different
boiling temperatures. So the very long carbon
chains in the oil have very high
boiling temperatures. So as hot as they are
they're not going to boil. They're going to stay in
their liquid form down here. And then the slightly
shorter chains they're going to boil and
evaporate a little bit. But then as they rise
they're going to cool down. And then they might
condense right over here. Then they can be pulled
away in pipes and then things that are even
slightly shorter chains than that will go a little
bit higher before cooling to even lower temperatures
before going back into a liquid state. And then they can be
collected over here. All the way until you get
to the very shortest chains, like the natural gas, that would
be collected out at the top. And the gasoline that
you put in your car it might be collected
right over here from this. So you're essentially
breaking up that oil into its different parts. And on some of the
other parts this might be motor oil right
over here, the thing that you used to lubricate your
engine, not fuel your engine. You might have jet fuel up here. And you have a whole ton of
other different-- kerosene, all sorts of things,
you are able to take out of that crude oil. But anyway, let's get
back to the gasoline. So the refinery got $3.25. Now we have to
transport that gasoline. So let's say $0.10
for transportation. So this is at $3.25
right over here. So now we're going to have
$0.10 for transportation. So that right over here is
$0.10 for transportation. I'll just write
transportation for short. And then it goes
to the gas station. And as I mentioned, gas
is heavily, heavily taxed. And depends on
what jurisdiction, what country, and even
states within countries. But for the sake of simplicity,
let's just say it's taxed at $0.50 a gallon, which is
not that different from what it's taxed at in many states. So now we're at $0.50 a gallon. So that would be right around,
so let's say-- actually, let me do a new color. I keep using the same
colors over and over again. So let's say this is
$0.50 a gallon tax. So that is tax right
over there going to the state and
federal government. And so let's see $3.25
is what the refinery got, $0.10 for transportation,
gets us to $3.35, $0.50 tax, so this is $0.50 tax,
gets us to $3.85. And then now we're
at the gas station. There essentially it's
going to cost $3.85 a gallon for that fuel. The gas station needs to make
some money to pay their costs. The gas station sales you
that fuel at $4 a gallon. And so you might say,
OK, the gas station, that already seems
surprisingly low. And that is actually
on the order of how much gas stations
actually make on a per gallon basis. You might say, hey, the
gas station made $0.15. $4 minus the $3.85 that takes
in all of these other costs. But actually a huge amount
of that $0.15 actually goes to the credit
card processors. Because most people pay the
pump with a credit card. And that's why some
gas stations like it, will give you a discount
if you pay in cash, because of that $0.15 as
much as, and or in general around $0.05 of that will
go to the credit cards, will go to the credit card
processors, credit card fees. I know this is getting messy. So the retailer will be left
with about $0.10 of margin. So anyway, hopefully
that gives you a sense of how crude
oil turns into gasoline. And when you pay
at the pump what is the breakdown for
the different players. And how much of
the money is going to those different players.